Today's Major Market Move: Japanese 5 Year CDS Climb Over 40% Since Oct, 2011

We started tracking sovereign credit default swaps back at the end of October of last year. The worst performer (higher prices = higher default risk) since then has been Portugal, who many expect to be the next target after Greece finally figures out how much flesh to extract from its bond holders. A hair's width behind Portugal sits Japan.

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The situation in Japan is quite precarious. They've been experiencing various degrees of deflation for over the past 20 years, their stock market sits at 25% of its all time high, and the USDJPY cross is again approaching the record level of 75.31. Here's the chart of the currency:

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There were two major events recently that could lead to things getting substantially worse in Japan:

1. Japan reported its first trade deficit since 1981. This occurrence is in no small part due to the aforementioned strengthening currency. Here's more from CNN:
   

   For the first time in 31 years, Japan has recorded a trade deficit. In simple terms, that means Japan imported more than it exported last year. Now this is not that unusual for some rich countries: the U.S. has had a trade deficit since 1975, and yet we've grown. But the U.S. economy is not built on exports. Japan's economic rise on the other hand, has been almost entirely powered by exports.

2. Japan's largest pension fund, which is one the largest holders of Japanese government bonds, recently became a net seller of JGBs. More from the Telegraph:
   

   The median age is already the world's highest at 44.5 years and is rising relentlessly, with growing numbers of elderly people drawing down life savings. The household savings rate has dropped to 2pc from 16pc at the end of Nikkei boom 20 years ago. The country's largest pension fund has become a net seller of Japanese bonds to meet payout demands.

With Japan's Debt-to-GDP sitting at over 200%, Japanese officials don't need anything putting upward pressure on interest rates, such as oh... let's see... the selling of bonds. What's interesting and quite the conundrum is that even with CDS prices rising, interest rates are flat to slightly down. Here's the chart of the sovereign 5 year bond rate courtesy of Bloomberg: